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Which Major Expense Should I Cut First – Housing, Food, or Transportation?

With the holidays’ smorgasbord of excess behind us, it’s probably a good time to consider where we can cut back in 2014.

A reader sent in a well-timed question this week, asking which major budget area – housing, food, or transportation – he should focus on cutting first.

It’s an excellent question, because as many of us have experienced firsthand, trying to cut them all at once can backfire.

Just as holiday party-goers shouldn’t hope to stick to the veggie tray and avoid all their favorite foods, budgeters should also try to be realistic and prioritize their spending cuts.

So, where to cut first?

Home is Where the Pocketbook Is

There are two ways to approach this question.

The first assumes you have greater control over your lifestyle (a luxury not all of us have, since fixed elements like job location and family size influence so many of our decisions), so bear with me through this hypothetical.

For most families, housing tends to be the largest expense, so it makes sense to prioritize this budget item, since it’s likely to yield the biggest savings.

Housing is usually a fairly fixed cost (mortgage and rent payments don’t fluctuate from day to day), so it’s also an easy way to standardize and lock-in your savings.

You can’t “cheat” on paying your rent or mortgage, unless you plan on couch surfing in the New Year.

Plus, depending on your particular situation, lower housing costs can also impact your transportation or food budget, since more expensive neighborhoods sometimes have fewer public transportation or low-cost grocery options.

So, it makes sense to start with housing, if at all possible, to reduce costs; getting roommates, having kids share bedrooms, or seeking a simpler/smaller home or less costly neighborhood can all make sense, assuming your needs allow for it.

Another Approach

Let’s say, on the other hand, that you’ve already reduced your housing costs as much as is feasible, or that your particular situation simply won’t allow for any major changes in this budget item.

The next step, then, is to determine whether you’re able to extract greater savings from your food or transportation costs.

But answering this isn’t as simple as choosing the bigger budget item.

For starters, your food bill might be more expensive than your transportation costs (or vice versa) for good reason – maybe you have a house full of growing kids or special dietary needs.

Second, you might just really love food, and so cutting it rather than transportation costs might be harder to accomplish. You might be more prone to slipping up or “treating” yourself.

Finally, there’s the question of standardization. For which costs can you create repeatable, standardized habits so that you avoid overspending?

(Buying a yearly bus pass or signing up for bulk/discount store memberships are good examples of techniques for ensuring budget compliance.)

Prioritizing cuts, then, might be more about understanding your own behavior.

Try out this flow for creating your budget priorities:

1. Can you reduce your housing costs? If yes, go to 2. If not, go to 3.

2. Reduce your housing costs as much as is practical. Once you’ve settled into this new budget and lifestyle, go to 3 in order to make new cuts.

3. Are your food or transportation costs greater? If food, go to 4. If transportation, go to 5.

4. Will you be more uncomfortable by cutting food rather than transportation costs? If no, go to 6. If yes, go to 7.

5. Will you be more uncomfortable by cutting transportation rather than food costs? If yes, go to 6. If no, go to 7.

6. Cut food costs, implementing techniques that enable you to make the cuts repeatable and standardized, such as downloading coupon apps, signing up for food coupon clubs, shopping at bulk/discount stores and sticking to core menu items.

7. Cut transportation costs, implementing techniques that enable you to make the cuts repeatable and standardized, such as joining a carpool club, buying a yearly bus/train pass, or switching to a cheaper, more fuel-efficient car.

Janet Al-Saad is the founder of the Five Ten Twenty Club, a website designed to help you improve your finances $5, $10 or $20 at a time.